There are two ways you can informally settle your debts: by personally contacting your creditors and offering a settlement, or hiring a credit or debt counselling company to settle the debts for you.

An informal settlement with your creditors involves contacting your creditors directly and offering them a lesser amount to settle the total outstanding debt. This approach can work when you have just one or two creditors, and you have the money to pay them immediately. There is no incentive for creditors to negotiate a reduction in the amount owed if they have to wait for several monthly payments. The obvious challenges with this option are coming up with a large sum of money to pay down the debts and getting all creditors to agree to the settlement.

Debt settlement companies recognize that people have a strong desire to avoid bankruptcy, so they offer services such as debt settlement arrangements for a fee. These companies have no legal authority to require creditors to alter their payment terms, which can be a major stumbling block to bringing a lasting resolution to your financial situation. Many of these companies advertise that they are a not-for-profit, which you might assume means they are working solely in your interests, but as with any industry there are some that are highly reputable and those that are less savory. Make sure you thoroughly understand what services they will provide you, the limitations of their authority to stop your creditors from collecting, how long will it be before your creditors will be paid, and the total cost associated with those services. 

Remember, the settlement agreement with your creditors must be in writing for it to be binding on your creditors.